Office Depot Breakup Bites Into Staples Earnings

Staples lost $766 million during a quarter when it booked nearly $1 billion in charges including the merger breakup fee.
Matthew HellerAugust 18, 2016

Staples posted lower-than-expected sales and swung to a loss in a quarter during which it closed stores as part of a new strategic plan.

Both Staples and smaller rival Office Depot have been restructuring in the wake of the collapse of their proposed merger. While Office Depot benefited in its second quarter from the $250 million breakup fee it received from Staples, the fee contributed to nearly $1 billion in charges that drove down Staples’ profit.

For the second quarter, Staples posted a loss of $766 million, or $1.18 a share, compared with a year-earlier profit of $36 million, or 6 cents a share. Excluding items, earnings were flat at 12 cents a share, in line with the company’s guidance for earnings between 11 cents and 13 cents.

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Revenue dropped 4% to $4.75 billion, missing analysts’ estimates of $4.77 billion, while same-store sales fell 5%, steeper than the 3.1 percent drop analysts predicted.

“Staples had hoped to weather the changing retail market by bulking up, but with the Office Depot merger behind it, the company is seeking to realign its operations,” The Wall Street Journal reported. “It is more aggressively going after midmarket business clients, closing retail stores, reducing costs and focusing its business on North America.”

The company closed five stores in the last quarter and is on track with its plan to close about 50 North American stores this year.

In announcing the new strategic plan, Staples said in May it would increase deliveries to 80% of total North American sales within three years in an effort to compete with Amazon. “We’re moving from a retail culture to a delivery culture,” Interim CEO Shira Goodman said on a conference call with analysts Wednesday.

On news of the earnings report, Staples’ shares fell more than 7% to 8.67. “The blunt truth is that market dynamics are firmly against Staples in that there are far more generalists in the stationery market than there used to be and online plays a much more significant role,” Carter Harrison, a retail analyst at Conlumino, told Reuters.